What is 'rationality'? - Economy - Deepstash





What is 'rationality'? - Economy

What is 'rationality'? - Economy



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Economic rationality

Economic rationality

We usually think about rationality as being sensible or reasonable. For economists, rationality means when you make a choice, you will choose the thing you like best. Economic rationality accepts that people will act in a relatively predictable way.

Economists use this assumption to build economic models or theories. A famous theory is the law of supply and demand which states that if something costs more, rational people will probably want to buy less of it and sell more of it.




'Rational choice theory' and 'Bounded rationality theory'

  • Rational choice theory thinks of people as economic super-men and women, also known as homo economicus. Economists use this theory to think about what 'economic man' would do, then add up the actions of billions of people to make models about how the economy works.
  • Bounded rationality theory looks at the ways we don't or can't act like homo economicus. It sees people as rational but limited by the information they possess and their ability to process that information.




Heuristics: Mental Shortcuts

Heuristics: Mental Shortcuts

In our daily lives, we do not have the time, knowledge or skills to make the perfect decision/choice every time, and it may be too exhausting and time-consuming to make really big decisions in a pe...

Cognitive Bias: The Other End Of Heuristics

When our heuristics make us do unreasonable things and ignore obvious dangers, it is termed as a cognitive bias, a systematic error that is based out of our unawareness.

These systematic thinking patterns form the mental models that make us perform automated functions, and blind our views towards reality.

The Most Common Cognitive Biases

  • Representativeness Heuristic: assumes that if something reminds us of something we know already, it is part of the same group.
  • Availability Heuristic: The more something comes in front of us, the more likely we think it is.
  • Anchoring Heuristic: Unconsciously giving a disproportionate amount of importance to the first piece of information that is learned.

The first views on motivation

The first views on motivation
  • At first, psychologist William James thought that only the initial act was conscious, thereafter behaviour was a spontaneous cascade of habits. He suggested we struggle with motivation when ...

Mathematics of motivation

When Ivan Pavlov and his dogs led to the discovery of learned behaviour through repeated exposure, and Edward Thorndike discovered the Law of Effect that stated that rewarded behaviours tended to increase, many psychologists were impelled to separate psychology from armchair introspection and formulated their theories as mathematical formulas.

  • The Drive x Habit Theory. Clark Hull's formula was sEr = D x sHr, which states that excitatory tendency (E) is the result of the drive (D) combined with the habit (H). The drive is nonspecific, such as hunger or thirst. The habit, however, depends on the stimulus (s) and response (r). But the theory turned out to be wrong and even opposite in many cases. 
  • Expectation x Value Theory. Drawing on ideas in economics and game theory, Edward Tolman and Kurt Lewis formulated an alternative account by evaluating motivation based on expectations. Tolman expressed the ideas as the mathematical formula: Subjective Expected Utility = Probability1 * Utility1 + P2U2 + P3U3 + … where subjective expected utility of an action equalled the motivation to act. But, if you expect a reward, why act and not simply passively wait for the expected reward? 

Motivation as change

Donald Hebb realised that existing theories were too focused on reacting to the immediate environment. Thoughts, ideas and goals could be just as strong for triggering action as sights and sounds.

Together with John Atkinson, they noted that the study of motivation had undergone a "paradigm shift", where motivation couldn't be seen as how actions get started, but how the organism decides to change its behaviour from one thing to another.

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Household Chores: The Old Way

Household Chores: The Old Way

Logic dictates that whoever is good at a particular household chore is to do the same, for maximum efficiency. This is known as Division Of Labour in simple economics.

If household...

Game Theory In Household Chores

A fair and equal division of labour using a method in game theory called ‘I Divide, You Choose’ creates a level playing field while making the person who is not adept at a certain task strive hard to level up the required skill sets.

Example: When dividing a piece of pastry between two kids, if one kid is told to divide the treat in half and the other is provided with an opportunity to choose which half is whose, then the first kid will ensure that the division is fair and equal.

The "We're In This Together Now" Discussion

Instead of an ‘us vs them' attitude while dividing housework, a thorough discussion followed by a fair and equal distribution of work is the way forward.

Good, honest communication about which chores are draining one partner and what can be tweaked to be less annoying for them is the key. Unpleasant chores can be done together as a team, with each partner dividing a load of work between the two, making it easier for both of them.